Treasurys slip ahead of data, supply

RachelKoning

WASHINGTON (CBS.MW) - Treasury market participants shrugged off a handful of would-be bond-positive factors taking shape in the financial world on Wednesday, opting to sell the notes and bonds that have performed well in recent weeks.

Analysts said the market had likely exhausted all of its flight-to-quality interest for the time being, even amid ongoing Middle East tensions and another record low for the euro.

Two key economic reports were set to hit the tape Thursday and Friday mornings.

Treasurys started the day in the plus column, but the tone changed near midday. Although a rally for the Dow Industrials proved short lived, even weak stock trade wasn't enough to boost the Treasury sector Wednesday and neither was a 40-cent drop in the price of crude oil a rallying force for the inflation-sensitive bond market.

The 2-year was pressured on competing new paper. Treasury sold $10 billion in 2-year notes Wednesday, a sale that was actually a reissuing of 5.75-percent 5-year notes sold in October 1997. The reissued paper earned a high yield of 5.845 percent, with 98 percent of the offers accepted, at an interest rate of 5.75 percent. The bid-to-cover ratio, a measure of demand slipped to 2.68 versus 2.93.

Stocks see red

The Dow Jones Industrial Average slumped 66 points to 10,326.48. Early in the day, shares of Nortel, the world's second-largest telecommunications equipment maker, plunged after the company reported slower sales, triggering a sharp slide in the technology-weighted Nasdaq. The Nasdaq Composite, led by weakness for Nortel, shaved 5.6 percent of its value. Read more in Market Snapshot.

In other markets, the euro made another all-time low in forex dealings, with one euro recently trading at 82.67 cents, off more than 1 percent.

December gold dropped $3.10 to $269 an ounce. The contract hit an intraday low at $267.70, its lowest level since the low of $264 seen in Sept. 1999. More recently, December crude fell 12 cents to $33.25 a barrel on the New York Mercantile Exchange.

Longer-dated government debt fell as dealers sold Treasurys to prepare for new supply of 10-year and 30-year debt from Fannie Mae expected next week.

The market was blasé about another planned debt buyback.

The government announced it would accept up to $1.5 billion in old bonds that would have matured between February 2019 and November 2022. Interest rates on the 11 eligible issues range between 7.250 percent and 8.875 percent.

Treasury will remove a total of $30 billion in debt through such operations, also scaling back new issuance and refinancing old debt at cheaper interest rates - all the result of government budget surpluses. In fact, the Clinton administration on Tuesday announced a record $237 billion windfall for fiscal 2000, the first time for three consecutive years of surplus since the late 1940s.

The difference in yield between a 30-year and a 2-year security stood at negative 11 basis points compared to negative 14 basis points in the previous session.

Volume stood at $17.4 billion at midday, about 26 percent above the average of the last five sessions, according to GovPX.

Treasury participants continue to watch events unfolding in the turbulent Middle East, with any resurgence in violence luring investors out of global stock markets and into the relative safety of U.S. government-backed debt. News that U.S. President Bill Clinton may hold separate meetings in Washington with Israeli Prime Minister Ehud Barak and Palestinian leader Yasser Arafat if progress is made toward ending nearly a month of bloodshed didn't offer much solace to financial markets, analysts said. Read more from CBS News.

Gains for longer-dated Treasurys - those most sensitive to inflation -- were kept in check in part ahead of key economy data Thursday and Friday.

Due for release on Thursday is the government's measure of salary and benefits expenses for U.S. companies, the Employment Cost Index. The consensus estimate for the ECI is for a 1 percent, exactly what it did in the second quarter.

And on Friday, markets get a look at the government's measure of growth in the third quarter.

Economists surveyed by CBS.MarketWatch.com expect economic growth to have slowed to a 3.4 percent pace in the just-concluded quarter. GDP grew at a 5.6 percent pace in the second quarter.

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